New Cos Act May Hit Flow of Credit to Sub­sidiaries

of ser­vice of whole-time di­rec­tors. The ob­ject of this pro­vi­sion is to en­sure di­rec­tors of com­pa­nies do not abuse their po­si­tion for per­sonal gain ei­ther di­rectly as a di­rec­tor of the com­pany or through any other per­son or sub­sidiary com­pany in which the di­rec­tor is in­ter­ested. The sec­tion cor­re­sponds to Sec­tion 295 of the Com­pa­nies Act, 1956. The old pro­vi­sions ex­cluded loans given by banks, or loans by pri­vate com­pa­nies, or loans by hold­ing com­pa­nies to their sub­sidiaries, from the purview of re­stric­tions on lend­ing to di­rec­tors. But Sec­tion 185 in the new Act has no such ex­emp­tion and, hence, loans by pri­vate com­pa­nies or hold­ing com­pa­nies to their di­rec­tors are not per­mis­si­ble. Un­der Sec­tion 186, it is per­mis­si­ble for a com­pany to give a loan or guar­an­tee any loan or pro­vide se­cu­rity for any loan to any other com­pany not ex­ceed­ing 60% of its paid cap­i­tal and free re­serves or 100% of its free re­serves, whichever is more. The old law ex­empted loans, guar­an­tees or se­cu­ri­ties pro­vided by banks or by hold­ing com- pa­nies to wholly owned sub­sidiaries.

The ex­emp­tions in sec­tion 186(11) of the new Act do not cover loans given, or guar­an­tees or se­cu­ri­ties pro­vided by hold­ing com­pa­nies to sub­sidiaries. With­drawal of such ex­emp­tions will make lend­ing to sub­sidiaries more com­plex and dif­fi­cult re­quir­ing share­hold­ers’ ap­proval for fa­cil­i­ties ex­ceed­ing the ceil­ings pre­scribed by Sec­tion 186. The ef­fect of the new pro­vi­sions is that loans ob­tained by sub­sidiaries from banks and other lenders for which the hold­ing com­pany pro­vides guar­an­tee or se­cu­rity over its as­sets, will also be in­cluded in its ceil­ings of 60% of paidup cap­i­tal plus free re­serves or 100% of free re­serves, thereby restrict­ing the ex­tent of bor­row­ing by sub­sidiaries. Sec­tion 186(11) also ex­empts “a loan made guar­an­tee given or se­cu­rity pro­vided by a bank­ing com­pany”, but when a bank gives a loan to a sub­sidiary com­pany, it ob­tains guar­an­tee for due re­pay­ment of the loan from the hold­ing com­pany or ob­tains se­cu­rity over any as­sets be­long­ing to the hold­ing com­pany. While the new pro­vi­sions ex­empt bank loans from ap­pli­ca­bil­ity of sec­tion 186, there is no ex­emp­tion for guar­an­tee or se­cu­rity given by a hold­ing com­pany for loans given by a bank to a sub­sidiary. The ex­emp­tion should have been un­am­bigu­ous as con­tained in sec­tion 372A(8) of the old law. The de­fec­tive word­ing of the ex­emp­tion will re­sult in bring­ing guar­an­tees given and se­cu­ri­ties pro­vided by the hold­ing com­pa­nies for loans given by banks to its sub­sidiaries within the purview of re­stric­tions con­tained in sec­tion 186. Non-com­pli­ance with the pro­vi­sions of Sec­tion 186 is an of­fence pun­ish­able with fine up to ` 5 lakh on the com­pany and im­pris­on­ment for of­fi­cers in de­fault. The banks and other lenders will have to en­sure that hold­ing com­pa­nies pro­vid­ing guar­an­tees or se­cu­ri­ties com­ply with the re- quire­ments of Sec­tion 186. This will be­come a hur­dle to the smooth flow of credit to sub­sidiary com­pa­nies.

The ab­sence of clear ex­emp­tions as con­tained in the old law, also raises the is­sue of con­tin­u­ance of ex­ist­ing loans, guar­an­tees given and se­cu­ri­ties pro­vided, which are not in com­pli­ance with pro­vi­sions con­tained in Sec­tions 185 and 186 of the new law. There is no tran­si­tory pro­vi­sion made in the Com­pa­nies Act, 2013 for credit fa­cil­i­ties al­ready be­ing availed of by pri­vate com­pa­nies or sub­sidiary com­pa­nies ei­ther from their hold­ing com­pa­nies or banks.

The only so­lu­tion to the prob­lem is to is­sue a “re­moval of dif­fi­culty or­der” un­der s e c t i o n 4 7 0 o f t he Com­pa­nies Act, 2013, to re­store fol­low­ing ex­emp­tions and clar­ify that pro­vi­sions of Sec­tions 185 and 186 shall not ap­ply to loans given by banks to sub­sidiaries with guar­an­tee of the hold­ing com­pany or se­cu­rity over as­sets of the hold­ing com­pany; and pro­vi­sions of Sec­tions 185 and 186 will have prospec­tive ef­fect.